Dubai World and Nakheel property arm to get up to $9.5 billion in new funds amid restructuring

Dubai offers $9.5B in new aid to struggling firm

DUBAI, United Arab Emirates — Dubai’s government on Thursday said it will pump up to $9.5 billion into Dubai World, outlining a long-awaited restructuring plan aimed at rescuing its debt-saddled chief conglomerate and recapturing the emirate’s image as a business friendly oasis in the oil-rich Gulf.

The proposal, which still needs approval from creditors, is key in clarifying the options for scores of lenders owed the majority of the $26 billion in debt which Dubai World in November said it was seeking to restructure. The conglomerate’s woes came to symbolize Dubai’s boom to bust as the global meltdown dried up the cheap credit on which the glitzy city-state had depended to fuel its meteoric growth.

“It’s a confidence booster,” said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi. He added, however, that the announcement was just a “first step in Dubai’s regrouping process” aimed at restoring its reputation.

The plan offers creditors full repayment on the principal of their outstanding loans over a five to eight year period by issuing new debt. It was not clear how much interest, if any, is being offered, but officials said the debt would not be backed by the government of Dubai, one of the seven semi-autonomous city-states making up the United Arab Emirates.

Sheik Ahmed bin Saeed Al Maktoum, the chairman of Dubai’s supreme fiscal committee, said in a statement that the support aims to ensure Dubai World and property development arm Nakheel “are key contributors to the strong economic future of the Emirate of Dubai and the wider United Arab Emirates.”

The plan calls for the restructuring of $23.5 billion of Dubai World’s total debt, including $14.2 billion owed to creditors other than the government. The government made it clear that the newly-announced funds are the last it will offer for the conglomerate.

As part of that deal, the government plans to recapitalize the conglomerate by offering as equity an $8.9 billion claim in the company, while also pumping in $1.5 billion in new funds, according to a Dubai government statement.

This is an “outstanding level of support from the government. We’re talking about a massive injection of cash,” Aidan Birkett, Dubai World’s chief restructuring officer, told reporters Thursday.

The proposal is also heavily focused on Nakheel, the Dubai World property development unit that was the force behind the manmade islands that helped put the emirate on the map.

Under its plan, the Dubai government would inject roughly $8 billion in new funds and recapitalize Nakheel by converting what it described as a $1.2 billion loan to the company into an equity stake. Another Dubai World property developer, Limitless LLC, is holding separate talks with creditors.

The emphasis on Nakheel is significant because property development was a linchpin in Dubai’s growth.

Real estate prices, that had soared earlier in the decade collapsed, by as much as 50 percent within a year amid the global downturn, the drop seriously undercutting the image of a city-state that grew into a bustling Middle East commercial and logistics hub packed with soaring skyscrapers, including the world’s tallest, on the back of the building boom.

Nakheel — many of whose manmade islands sit empty — said its plan calls on banks to restructure their debt “at commercial rates,” while other creditors still owed repayment “will be offered a significant cash payment shortly and a tradable security,” according to a statement by the company.

Birkett said the plan’s priority was to address Nakheel’s problems, including paying contractors — some of whom have not been paid up to a year. The company also plans to restart some development projects to reassure investors who have taken a loss when Dubai real estate bubble burst in 2008.

“If we fix Nakheel then we can go a long way to fix real estate issues in Dubai,” Birkett said, adding that the troubled developer will be absorbed by the government directly. The restructuring plan is expected to take months to implement, officials said.

Also key in the Nakheel plan was that the company’s outstanding Islamic bonds would be paid on maturity this year and in 2011. Nakheel in December paid roughly $4 billion on a maturing bond, tapping into bailout funds provided by Abu Dhabi in what was seen as the first key test of Dubai World’s debt crisis.

The overall plan was warmly greeted in the market, with the benchmark index on the Dubai Financial Market — the emirate’s biggest bourse — closing 4.3 percent higher.

“This was very much needed to get things moving again in Dubai,” said Jan Randolph, head of sovereign risk analysis at London-based IHS Global Insight. “The turmoil caused by Dubai World’s financial problems hung like dark cloud over prospects, not only for Dubai but throughout the UAE and Gulf.”

The announcement in November about Dubai World’s debt woes hammered regional markets, raising new fears that the world’s financial system remains exposed to large amounts of debt that will not be repaid in full. It also highlighted a lack of transparency within the booming oil-rich Gulf.

Dubai’s government further rattled markets by stressing that creditors were mistaken in having assumed that Dubai World’s roughly $60 billion in total debts were state-guaranteed. That revelation prompted ratings agencies to quickly revise their assessments of government-related entities like Dubai World, which is controlled by the emirate.

Fitch Ratings noted that of the $9.5 billion pledged by Dubai in the restructuring, only about $4 billion comes from internal Dubai resources, divided over three years. Officials said $5.7 billion of the new funds were to come from a loan previously extended to Dubai by Abu Dhabi.

“This suggests that Dubai’s direct ability to provide additional support remains relatively limited,” the ratings agency said in a statement Thursday.

While the proposed plan lays out options for creditors — essentially a debt-for-equity swap, extending loan maturities and guaranteeing 100 percent repayment of the principal — it leaves several questions unanswered.

Analysts said Dubai must quickly disclose how it intends to make pending interest payments and, more broadly, provide assurances that the Dubai government is able to settle its own debt. Including Dubai World’s debt, the emirates owes an estimated $100 billion. No official breakdown has ever been provided.

“The fact that the government has taken over the (Nakheel) debt as an equity participant will beg the question what will happen to Dubai government’s debt,” Sfakianakis said.

IHS’s Randolph also noted that the plan, as presented, did not make clear what options were available to creditors who wanted to opt out of and leave with a “haircut,” or a smaller share than they are owed.

“There isn’t an obvious exit for those that want an exit,” he said, adding that one option banks may pursue, if made available to them, would be to securitize the loans and resell them.

Officials also did not discuss potential sales of some Dubai World units. The conglomerate has exempted its profitable marine terminal operator DP World from the restructuring.

“I’m under no pressure to sell anything,” Birkett said. But, he acknowledged, assets will “inevitably disposed of.”

Schreck reported from Baghdad. Associated Press writers Brian Murphy contributed reporting from Dubai and Tarek El-Tablawy from Cairo.